Buildings

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

This piece provides a brief discussion about the potential future design of housing and how investors can seek to gain exposure to a theme that we expect to grow in importance.

Visitors to many trade fairs and theme parks have often had their curiosity piqued by exhibits titled ‘the home (or perhaps the office) of the future.’ The premise is simple, namely an attempt to envisage how next-generation homes may look and work. This matters since for most people their house is the most expensive purchase undertaken in their lives. Often, these futuristic visions are sponsored by builders, developers or technology companies and the author of this piece recalls in his younger days as an analyst being taken to just north of London by Orange, the mobile phone operator, to witness their take on the future, a dwelling where light switches, for example, could be operated by cellular devices.

However, there are two problems with these potentially compelling visualisations of the future. First, after a few years it is often the case that each successive version of futuristic exhibits tends to start looking dated and old-fashioned with its contents either having become commonplace or never having caught on at all. More importantly, given critical global secular mega-trends such as changing demographics and energy resource availability, debates concerning the ‘house of the future’ need to take on a far less frivolous nature; governments, corporates, and investors need to frame their discussions around the topic of efficient resource allocation. New gadgets and appliances can wait for now.

Forecasts from the United Nations (UN) highlight that the world’s population is set to grow by over 30% in the next forty years, with the earth containing 9.15bn inhabitants by 2050 against 6.91bn at present. Many of these people will need new homes. With such growth, Vinci, a French construction company, estimates that within the next 15 years it will become necessary to build at least 4,000 housing units an hour worldwide to accommodate the planet’s growing number of inhabitants. The requirement is exacerbated by the inexorable shift towards urbanisation. Whereas just 9% of the globe’s population lived in cities in 1900, according to the UN, global city-dwellers had become the majority a century later and, on its forecasts, by 2050 the world’s urban population will be three times the size of its rural counterpart.

The concomitant of population growth and urbanisation is the emergence of what the International Energy Authority (IEA) dubs the ‘energy middle class.’ In other words, on the IEA’s forecasts, by 2030, an additional 2bn people globally will be using electricity for the first time. Herein lies one of the key problems: given the world’s present energy mix (85% derived from crude oil, coal and natural gas according to the IEA) is unlikely to change meaningfully in the near-term, planners will need to reconcile a forecast doubling in global energy demand by 2050 with a required halving in carbon dioxide emissions.

Buildings (defined both as households and offices) are the key energy-consuming culprits. A study by the European Commission shows that buildings consume more energy (40%) than do either industry or transportation (27% and 23% respectively). They are also responsible for around 30% of all carbon emissions. More than 60% of household energy is spent on heating, double the amount spent in appliances. The remainder is used for water and lighting. Targeting how households are heated therefore seems like a logical starting point. Moreover, with approximately half of Europe’s 210m homes (there are 130m in the US) built before 1970, not only is it important to consider how new houses are built, but also how existing ones are made more robust for the future via renovations.

Legislation will go some way to dictating how future homes may look. The Kyoto Protocol aims to reduce overall greenhouse gas emissions to 20% below 1990 levels by 2020. Against this background, the 2010 Energy Performance of Buildings Directive calls for “nearly zero energy buildings” throughout Europe by 2020 and some countries have already anticipated this prescription by introducing their own targets such as “Zero Carbon 2016” in the UK. The picture in the United States is less rosy, with just 11 of the country’s 50 states having introduced the 2009 International Energy Conservation Code, which is about half as demanding as European regulations. Policy in other countries including Russia, Japan, South Africa and much of Latin America is somewhat more stringent.

Urban planners are therefore partially constrained by the need to adhere to relevant legislation. Other important considerations include the ease of product availability (and substitution) and the need to meet certain comfort levels. Energy efficiency is inevitably correlated with the economic development cycle and so while more advanced countries may emphasise a focus on technological materials such as coated glass and also consider the use of renewable energy sources, in emerging economies solutions may be based around exterior and infrastructure materials.

The good news is that there appears to be no shortage of innovation. One possible vision of the house of the future may comprise a dwelling built from phase change materials including smart glass, where electricity is powered from solid oxide fuel cells and lighting is provided by emitting diodes. A number of companies are already undertaking the production of such elements, and further developments seem likely.

Taking each in turn, a phase change material is a substance with a high heat of fusion which, in melting and solidifying at a certain temperature, is capable of storing and then subsequently releasing large amounts of energy. Practical examples could see such materials being used for energy storage, the conditioning of buildings and off-peak power utilisation (heating and cooling water). Next, smart glass refers to electrically switchable glass or glazing that is able to change light transmission when voltage is applied. Certain types of smart glass permit users to control the amount of light and heat that pass through it. In other words, at the touch of a button, such glass could change from transparent to translucent, partially blocking light, while maintaining a clear view of that which lies behind the window. Another type of smart glass may allow for privacy at the flick of a switch.

Houses with in-built solid oxide fuel cells would be able to produce electricity directly from oxidising a fuel. They have high efficiency, long-term stability, fuel flexibility, low emissions and cost relatively little. Staying on this theme, further developments concerning photovoltaic cells seem probable. Solar power provides a theoretically inexhaustible supply of energy and technological improvements are now resulting in roof-mounted panels for distributed production, as well as those that can be integrated into walls and windows.

The more humble light emitting diode (LED) can also provide some simple gains. Such devices offer many advantages over incandescent light sources including lower energy consumption, a longer lifetime, smaller size and greater reliability. Carbon Footprint Limited, a UK consultancy, estimates that a standard light bulb used for four hours a day produces 63kg of carbon dioxide annually and costs £14.60 ($23.55) per annum. By contrast, an LED would produce less than 20% of the bulb’s carbon output and cost just £2.63 ($4.23).

While such developments are fortunately no longer just the imaginings of scientists, there are still a number of factors that may conspire against the optimal house of the future. It remains unclear how important energy/ carbon minimisation legislation is for already heavily indebted governments with other, more pressing near-term commitments. Without state support, it is perhaps difficult to see whether the initiative can be taken solely by the private sector. Moreover, at present, there exist a number of competing products and technologies, especially given that the understanding of the benefits of new materials, systems and buildings is still relatively nascent. Finally, there may also be inconsistencies across different geographies and the impact of natural factors – namely weather – can have a major influence on heating and insulation priorities.

Despite such limitations, we believe there will still be a number of potential winners. With inexorable demographic and socioeconomic factors at work, new houses will need to be built, and existing ones renovated. Rather than seeking to gain exposure to this theme via listed land-owners and property developers, we believe it is potentially more constructive to focus on those companies that are in the vanguard of technological development. Companies such as Vinci, Holcim, CRH and Wolseley in Europe, Vulcan in the US and Cemex in Mexico are all – to different degrees – developing and/or producing more sustainable building materials. Meanwhile, diversified capital goods conglomerates such as US-listed General Electric and Emerson as well as European businesses such as Siemens and Philips are devoting resource to more efficient means of storing and transferring electricity. In addition, these businesses are involved in developing new light sources (bulbs) and improved household appliances.

The two companies, however, that stand out and appear to us to be taking a lead in this area are Saint Gobain and Schneider. The former is involved in the design, manufacture and distribution of what it terms “sustainable habitat solutions.” Saint Gobain spends more than 2% of its revenues on research and development annually, resulting in around 400 new product patents a year. The company aims to derive 25% of group revenues from new product sales by 2015. With a distribution network of more than 400 branches in 26 countries, Saint Gobain stands a strong chance of building share in this segment. Schneider is the global leader in low and medium voltage energy systems and is pioneering developments with regard to smart grids. For households, this implies an increasing move towards home automation (Schneider is also a top-five player in in-building video security systems), allowing users to manage and monitor their energy and lighting needs.

Discussions about the future often run the risk of being either irrelevant or quite simply wrong. Nonetheless, it does seem clear to us that all stakeholders will need to consider how to allocate scarce energy and material resources efficiently to a rising population with growing housing needs. Future houses will likely contain gadgets and appliances which we cannot conceive at present, but they will also need to be built in a more robust and sustainable fashion. Here, we are on safer ground (no pun intended), and the good news is that investors already have a range of listed stocks with which to gain access to the theme.

Alexander Gunz, Fund Manager, Heptagon Capital

Disclaimers

The document is provided for information purposes only and does not constitute investment advice or any recommendation to buy, or sell or otherwise transact in any investments. The document is not intended to be construed as investment research. The contents of this document are based upon sources of information which Heptagon Capital LLP believes to be reliable. However, except to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to the accuracy or completeness of this document or its contents and, Heptagon Capital LLP, its affiliate companies and its members, officers, employees, agents and advisors do not accept any liability or responsibility in respect of the information or any views expressed herein. Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Where this document provides forward-looking statements which are based on relevant reports, current opinions, expectations and projections, actual results could differ materially from those anticipated in such statements. All opinions and estimates included in the document are subject to change without notice and Heptagon Capital LLP is under no obligation to update or revise information contained in the document. Furthermore, Heptagon Capital LLP disclaims any liability for any loss, damage, costs or expenses (including direct, indirect, special and consequential) howsoever arising which any person may suffer or incur as a result of viewing or utilising any information included in this document. 

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